Interview with a "Silver Man"

Earlier this week I had the chance to talk to David Morgan from Silver-Investor.com and ask him some questions about the futures markets and silver. Here's David's bio and below you'll see my mini interview!

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Trader's Blog: David Good morning! How are things?

David: Things are well, just got back from vacation and am looking forward to getting my nose back into the silver that's for sure.

Trader's Blog: David let me get right to it here....Can you give us a brief overview of how the futures markets operate?

David: Until very recently the futures market has been operated the same way basically from the inception.  It’s what’s called an open outcry market.  Guys jam literally into a ring.  It’s a round section with tiers going up from the floor, like a cone.  The levels represent different months. This same layout is for different commodities; a wheat pit, a corn pit or ring as referred to in New York.  Now most futures contracts trade electronically.

What takes place is an auction method, and the futures price is set by this method.  This method actually sets the spot price.  The spot price is called the cash market.

Now, once that price is set, that doesn’t necessarily mean that you can buy silver or gold at that price that’s set in that pit.  You can buy it for that price plus a few other fees, such as a delivery charge and transportation, but basically you will pay the price set.

I want to be very clear; there are times that the silver market and other markets go into what is called backwardation, where you actually have to pay more for immediate delivery of the real product than you can purchase the same commodity for in a future delivery month. This is a sign of a tight supply situation and usually does not last for much more than a few days.

Conversely, in the past we have seen the opposite. If we go back to the 1980 high of January 21, 1980 – the peak in precious metals in real terms, not nominal terms the price of silver in the physical realm was less than the futures price. I was in Los Angeles at the time, and even though silver in the futures market was over $50.00 the ounce, in the futures exchange, on the spot market, closing that day, the actual price that you could sell your silver physically for all over Los Angeles, every dealer that I checked with  – was $35.00 the ounce.

So the dealer community bid it back $15.00 from the actual futures price.  I want people to be aware of the facts and this was at the high and a very fast moving market.  I’m really trying to be objective here.  Now, the way we’re going in the silver market and the gold market right now is that anyone that really understands these markets are willing to go to the futures markets and take physical delivery.

I do expect these premiums to close up, meaning, that what you have to pay your local coin dealer for silver being greater than the spot month is going to narrow so that if you have to pay, as an example, $14.00 for one ounce of silver at your coin dealer, and the futures price is 10, those two will come together at some point in the future.

I wrote an article about that recently; if you haven’t read my Web site, you might go there, Silver-Investor.com. It’s called Silver Arbitrage; where I explain these arbitrage opportunities, usually don’t last for a very long time.

Trader's Blog: Okay.   I guess what I’m driving at is reading the Internet that some say big interests are depressing the price through Comex.  I don’t understand how they succeed in that and why they don’t just lose money and go out of business and why the price doesn’t just reach its natural equilibrium due to supply and demand rather than this manipulation?

Continue reading interview

7 thoughts on “Interview with a "Silver Man"

  1. I am also unable to read the rest of the interview. I used your provided link, but it just goes to a page that states "Sorry, no posts matched your criteria."

  2. The significance of the December contract, which is the closest one currently, is that a number of people are expected to take physical delivery when the contract expires. Those who believe there is a manipulation in the price of silver believe this MAY finally send the price of silver much higher due to a default (meaning someone being unable to deliver the actual silver) and finally revealing that there is a silver shortage.

  3. I have been hearing a lot about watching the December silver contract. What is this significance over any other monthly contract?

    Louis,

    I believe people are talking up the December contract because it has the most liquidity. The best months to trade are usually the "front months" (those that are closest to expiration) for the fact that they have the most volume and activity.

    Best,
    Brad

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